The symmetric bell-shaped distribution described fully by its mean and standard deviation. It is convenient and often assumed, but it understates extreme events in markets.
Where you will meet it
Normal distribution comes up in 30 learning outcome notes across the FRM syllabus.
A few of them:
Random Variables FRM Part I · Quantitative analysis
“It equals 3 for the normal distribution.”
Measures of Financial Risk FRM Part I · Valuation and risk models
“The normal distribution is symmetric, with skewness 0 and kurtosis 3, and is fully described by its mean and variance.”
Estimating Default Probabilities FRM Part II · Credit risk measurement and management
“It maps the distance to an expected default frequency using a large empirical default history instead of the normal distribution.”
Estimating Market Risk Measures: An Introduction and Overview FRM Part II · Market risk measurement and management
“For a normal distribution, the quantile (Quantile) is the mean plus z standard deviations.”
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